Fed Chair Ben Bernanke said yesterday that mortgage finance companies Fannie Mae and Freddie Mac should sell off the bulk of their $1.4 trillion in assets and "anchor" their investments to the provision of affordable housing for low-income Americans. At present, less than 30% of their mortgage assets -- about $420 billion -- promotes affordable housing. The two government-sponsored enterprises [GSEs] own or guarantee roughly 40% of U.S. residential mortgages, a $10.5 trillion market. They are owned by shareholders, but possess federal charters for the promotion of home ownership -- a fact that has fueled a belief that the government will not allow them to fail. Their senior debt, said Bernanke, "should be used only to finance assets such as affordable-housing mortgages that have...a clear and measurable public benefit." The size of the GSEs' portfolios, their swift growth and lack of market discipline "raise substantial systemic risk concerns," he said. Rep. Barney Frank, chairman of the House of Representatives' Financial Services Committee, plans to introduce a GSE reform bill by the end of March; and a House subcommittee will be holding a hearing on GSE regulation on Monday. Fannie Mae shares closed yesterday up 3.2% at $54.83; shares of Freddie Mac closed up 1.2% at $62.11.
Sources: MarketWatch, Bloomberg, Reuters, Money.com
Commentary: Freddie Mac Moves to Contain Subprime Fallout • A Low-Risk Long/Short Financial Institution Arbitrage Strategy • Fannie Mae, Freddie Mac Mortgage Portfolios Escape Regulatory Caps
Stocks/ETFs to watch: Fannie Mae (FNM), Freddie Mac (FRE). ETFs: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
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